Rise in investment could kick start recovery

UK businesses are sitting on a pile of cash and need to loosen the purse strings and invest more according to new research from Ernst and Young. Their latest macroeconomic forecast for the UK can be found here.

There has been a shift in the share of total factor incomes flowing to workers and a corresponding rise in the share of profits in GDP (by factor income). Ernst and Young find that wages and salaries in the UK fell from 46.5% of GDP to 45.3% last year, while the share of non-financial company profits increased from 15.9% to 16.2%. The non-financial company financial surplus increased from £56 billion to £71 billion, almost 5% of GDP helped by a fall in interest payments on debt and a sharp fall in dividend payments.

For economists at Ernst and Young, the cash mountain provides a big opportunity for the UK economy. They are urging companies either to step up capital spending commitments including creating extra capacity to export products. Or return surplus cash to shareholders through bigger dividends. The Ernst and Young forecast shows business investment in the UK increasing by 12.3 % this year and another 14.1% in 2012. With housing investment slowly recovering, this easily outweighs the effect of lower public sector investment, pushing total investment up by 5.7% this year and 8.1% in 2012.

Higher investment provides a boost to aggregate demand and also the economy’s productive capacity. And a rise in exports will help to re-balance the economy. For cash to be committed to investment projects requires sufficient business confidence and this is where the Keynesian idea of animal spirits becomes so important to where the UK economy is heading over the next year or two.

Business investment in the UK

Data from Timetric.

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Total Investment: Businesses, quarterly, UK from Timetric